Small Was the Debt I Thought

By Derek On February 13, 2012 Under Broker Notes

From: Derek Hillen
Sent: Monday, February 13, 2012 10:54 AM

“Slight was the thing I bought,
Small was the debt I thought,
Poor was the loan at best—
God! but the interest!” –
Paul Laurence Dunbar

While the Greeks gave us the word “democracy,” which means “popular government,” the current government of Papademos, after passing massive austerity measures on the crippled Mediterranean economy today, can probably safely drop the first word. The Greeks also gave us the words “chaos” and “anarchy,” which is what is happening on the streets of Athens right now. Even George Soros, who has been busily buying Italian sovereign debt, believes Greece is doomed. In a CNN interview today he said the Greek austerity package is “not necessarily going to work in the long run, but it will certainly buy you another six months of quiet..” The average “Greek in the street” who is facing 20% unemployment, an economic depression and swingeing pension cuts may not agree about the “six months of quiet.”

Now that the austerity package has passed the vote in parliament, what about the vote of the Greek in the street? Finally, I also note the word “compliance” has no connection to Greek at all…


We remain concerned about the health and future health of the Chinese banks. Headline news today in the FT reports that “China has instructed its banks” to begin rolling over loans to local governments one third of which are due to be repaid this year. The problem as we all know is they can’t be repaid this year and more than a few won’t be repaid ever. Loan maturities are reportedly to be extended up to four years in the draft of this plan. The banks take the first hit but those dud loans won’t be reported in their NPL ratios and are invisible to investors because the loan is extended and not in default; it isn’t an NPL. Valuation discounts to the market overall will continue to keep bank share prices depressed.

Today we downgrade BoCom (3328 HK) and cut our target price 14% to $6.30 as the bank faces fund raising of up to Rmb 50 bn. Recent market chatter indicates this could come soon and in the form of a private placement, due to the fragmented shareholder structure of the bank. Minority shareholders would face dilution of around 14% if true. Alternatively, the bank could issue new H shares to at least allow minority shareholders a chance to preserve their stake. Either way analyst Stanley Li feels BoCom is unlikely to outperform its better capitalized and larger peers, ICBC, CCB and BoC.


Apple is filing another major lawsuit against Samsung and is seeking to prevent sales of Samsung’s Galaxy smartphone. This is an indirect attack on Google’s Android operating system. Apple is cheesed off that the latest version of Google’s Android OS, which Galaxy incorporates, includes one of the four patents the International Trade Commission ruled in an earlier suit that an HTC (2498 TT, Reduce) smartphone had infringed upon. In the high stakes global technology cold war, this battle is again playing out in Korea (Samsung) while Apple (the US) attacks Google (the USSR) indirectly. Settlements here could be in the billions of dollars. I expect the GTCW, the global tech cold war, to continue for more than a handful of years.


You can get our research by typing MASR <Go> on Bloomberg.


Derek Hillen, CAIA

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